MICROINSURANCE. Virginia Tan, Allen & Overy LLP. protection, risk

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1 MICROINSURANCE Virginia Tan, Allen & Overy LLP Type: Legal Guide Published: June 2012 Last Updated: June 2012 Keywords: Microinsurance, protection, risk

2 This document provides general information and comments on the subject matter covered and is not a comprehensive treatment of the subject. It is not intended to provide legal advice. With respect to the subject matter, viewers should not rely on this information, but seek specific legal advice before taking any legal action Any opinions expressed in this document are those of the author and do not necessarily reflect the position and/or opinions of A4ID Advocates for International Development 2012

3 What is microinsurance? Microinsurance is an arrangement that offers financial protection to individuals and groups with a low-income against specific risks in exchange for premium payments. Microinsurance is run in accordance with generally accepted insurance practices but is designed to meet the needs of those who are otherwise unable to access mainstream insurance. How does microinsurance differ from general insurance? Microinsurance is based on the same principles as most other forms of insurance, with a number of key differences: Transaction sizes are smaller and premiums are lower; The target audience consists of those with low incomes, traditional jobs/ businesses and a limited knowledge of insurance and the benefits that it affords; Products offered are simpler, often providing just one type of cover rather than bundles; More flexibility is possible in both product design and premium payments. Due to the irregular income stream of the clients, microinsurance arrangements may allow payments to be made at irregular times and in uneven amounts; The claims process is faster and less complicated, involving substantially less documentation. As a result, microinsurance claims are usually resolved quicker than most insurance claims, which must go through a more stringent assessment process; Less regulation is imposed and enforced, though some countries are beginning to regulate the microinsurance industry in a more structured manner; and Underwriting is a simpler process (i.e. there are fewer terms and conditions and exclusions) as relatively small sums are involved.

4 Who is microinsurance aimed at? Microinsurance is aimed at a broad range of clients including individuals, households and whole communities in both rural and urban areas. Microinsurance is targeted at those with low-incomes (in particular, those living on between approximately $1 and $4 per day). Without a way to manage risk they can be hit hard by sudden events for which they have not planned (including crop failures, death of relatives, ongoing health issues). Many of those who use microinsurance work informally or in unpredictable sectors such as agriculture and, therefore, do not have a regular flow of income. Often, microinsurance is combined with other services provided to clients of microfinance institutions. However, it is also used by members of private mutual health organisations and women's associations, amongst other groups. The provision of microfinance is more prevalent in certain regions than others, with certain products often finding particular popularity in specific countries. For example, the developing Asia-Pacific region is a huge market for microinsurance products; in India, particularly, the commercial impracticality of provision for a huge population renders health microinsurance extremely popular. Latin America, too, has been an area of fast growth, with pensions and life insurance becoming especially important to large rural communities in harsh terrains such as Bolivia and Peru. One of the largest markets for microinsurance, however, remains in Africa, where a lack of resources or infrastructure and a heavy reliance on agriculture in developing nations has stimulated growing interests in (amongst others) credit, life, funeral and agriculture protections. Key products and players A wide range of microinsurance products are available from a wide range of sources, with a further substantial number in development. Features of a majority of these products include innovation, technology, and alternative channels of distribution, enabling them to reach and appeal to as many members of their unusual target population as possible.

5 Products: (1) Life - Credit Credit life protection is the most popular microinsurance product globally. Usually manifested as a life insurance policy designed to pay off a borrower's debt if that borrower dies, such insurance may primarily benefit the lender. However, in many jurisdictions, dependants of a borrower may become liable for the debt following that borrower s death, creating a strong market for insurance which will protect them against such a liability. As well as being offered as a standalone microinsurance product, credit life protection is often included as a mandatory part of any microcredit loan granted to a member of the low income population. (2) Life - Savings Pensions are a particular consideration for those employed in low-paid manual labour. In India and China, there has been a substantial push by insurers and microfinance institutions to offer innovative pensions products to combat the poverty faced by elderly people in rural areas following their loss of ability to carry out agricultural work. In South America, Aon Bolivia have recently offered a new and simple retirement product targeting the working class population, which requires 100 low monthly payments and results in payments of double that amount for the next 70 months. Products aimed at mobilising long-term savings and encouraging wealth creation are a more immediate solution to wealth management for those with low incomes. For example, ICICI Prudential Life has partnered specifically with a tea producer to offer unit-linked endowment products to Indian tea plantation workers, encouraging savings and an improved quality of life. Delta Life also offers endowment products in Bangladesh, providing long-term savings with built-in insurance, should the depositor die before the endowment term is up. (3) Life Protection Life insurance can be offered as a microinsurance product, providing dependants of the policy holder with a lump sum and/or maintenance payments for a set or indefinite period following the policyholder's death. As an example, Zurich and BancoSol in Bolivia are currently offering term life insurance and hospitalisation

6 insurance, the low premiums for which can be paid through monthly deductions from a savings account. A lower-premium alternative is often funeral insurance, covering the costs of the deceased policy-holder's funeral only, rather than provision for dependants. Accident and disability insurance can also help families to protect their income where the breadwinner is injured for a period of time or rendered permanently unable to work by such an injury. In China, PICC recently offered a pilot scheme to insure internal migrants against work-based accidents. (4) Agriculture Insurance to protect against weather risks, pest, diseases and economic problems can be offered to both individual farmers and to governments in emerging economies. For individuals, agricultural insurance offers protection against loss of income and the cost of rebuilding, whilst for governments it can allow risk shifting to other sectors of the economy. There are, unfortunately, administrative burdens, high costs and a risk of claims based on moral hazard or fraud. As such, government subsidies have historically been required for viability. There have been, however, recent innovations in index-linked insurance (such as rainfall index insurance and minimum temperature insurance), allowing greater measurability and objectivity, whilst microchipping animals has been used to prevent fraud. (5) Assets/property Usually, property microinsurance will be linked to a loan, but there are some insurers who are willing to offer this as a standalone product. This type of insurance can protect against loss of property, personal assets, business assets and agricultural equipment. There has been increasing emphasis on protecting assets from natural disasters, including a compulsory scheme by the Gujarat State Disaster Management Authority to provide assistance to families whose houses had been destroyed in an earthquake of However, this product remains unpopular with its target audience, largely due to difficulties in pricing such insurance and a cultural unwillingness to spend part of a low income on protecting assets over providing for people.

7 (6) Health Given that health problems are more prevalent amongst the low income population, health microinsurance offers an opportunity for families to protect their income, earning capacity and expenditure, as well as encouraging use of healthcare services. This is the product for which there is greatest demand, though the limited availability of healthcare providers and the correct infrastructure has often rendered it unavailable in rural areas. Commercial viability has also been impossible in some countries, as the cost of building up the infrastructure would result in restricting benefits. Nevertheless, the steady flow of revenue and the high demand have made this product popular with insurers, cooperatives and informal solidarity groups alike. NGOs and banks in Africa, especially, have recently started pilot schemes aimed at providing full AIDS/HIV treatment, education and preventative treatment through lowcost microinsurance schemes and programmes. (7) Islamic-compliant Microtakaful is a shariah-compliant form of microinsurance which may cover any of the instances above. In keeping with the beliefs of the Islamic faith, such insurance is based on the principle of shared risk. Players and distribution Microinsurance products are offered by, amongst others, licensed insurers, microfinance institutions, NGOs, healthcare providers and informal mutual assistance/friendly societies or community schemes. Licensed insurers include large, multinational corporations which also serve the retail and macroinsurance markets and smaller microinsurance-exclusive, local entities. Given the nature of the target market, there are a number of ways in which the products can be advertised, offered and delivered, but innovation is key. Increasingly, licensed insurers are teaming up with banks, self-help groups, local shops and labour unions to offer microinsurance products, effectively reversing historical issues of distrust and allowing the products to reach greater numbers of people. For example, SEWA, a trade union in India, serves as an intermediary, offering links with insurers and carrying a portion of the risk itself in order to make death, health and hut insurance

8 affordable to its members. The problems associated with premium payments for those with no fixed household or stability are also being addressed through use of mobile phones and the cooperation of mobile network providers. Key issues facing microinsurance now and in the future Lack of awareness One of the major challenges facing the Microinsurance sector is lack of awareness about insurance itself and insurance products among people with low income. Due to a lack of information about the benefits of insurance people are often wary of it and view it in a negative light. They prefer to rely on traditional arrangements or religious practices. This viewpoint means that fewer people in lower income families would consider taking out insurance which in turn leads to a lack of demand. Products often not what people need Microinsurance providers are required to tailor their products to the needs of their low income target market. Standardised products often do not meet these needs. By providing additional services information such as preventative consultations with doctors or weather forecasts/advice on crops, insurers could encourage people to view insurance in a more positive light which might lead to increased demand. Relative Costs and Complications Microinsurers applying standardised methods find that operating costs are very high due to the different circumstances they face in target markets - including trying to a reach a population spread out over a large area. Many large insurers do not have much experience of selling to people on low-incomes, which can be a barrier to entry. Also, although the claims process is usually simpler than that of other forms of insurance, it can be extremely difficult to tailor what essential paperwork is required to the understanding and level of the target market. Lack of quality date on risk The lack of quality data makes it difficult to assess and price the risk. Products need to be reasonably priced to attract consumers but they also need to be profitable. In

9 order to persuade people to buy insurance it is necessary to demonstrate that insurers understand the risks they face, such as the risks faced by farmers in a particular rural area. If you can tailor the insurance to their needs this also means you will be more likely to sell it. Regulation Insurance regulation aimed at large insurance companies could hinder the growth of microinsurance. Barriers such as extensive compliance which creates a draining administrative burden can deter insurers from entering the sector and limit its growth. Governments need to use a focused approach towards microinsurance and simplify regulation to encourage growth in the sector. Conclusion Microinsurance has the potential to make a massive difference in people s lives, helping to keep them above the poverty line and, by cushioning them against disaster, allowing them to focus on a better future. Microinsurance has started to become a practicable option for low income households to protect against adverse events and also as a tool for governments to pursue economic and industrial development. However, there are still hurdles to overcome; more education is required as to the benefits of insurance, how it can safeguard against unexpected events and how it can be viable in terms of cost. Poor infrastructures, a lack of resources and cultural issues have pushed many insurers to team up with NGOs, governments and local businesses/solidarity groups to advertise and distribute microinsurance products, and such innovation appears to be key to expansion. Microinsurance providers are increasingly turning to innovation to tailor their products to a low income population, simplifying structures, creating flexible premium mechanics and reducing administration, all of which promotes understanding and trust. Insurers entering into the microinsurance market are likely to have to adopt a long-term view of profit-making, but costs can be reduced and trust can be gained through public-private partnerships (PPPs) with governments, using their expertise to assist and to increase awareness of the benefits of microinsurance in low-income communities.

10 For further information, please consider the following: mid=49968&preflangid= XTMICINS/0,,menuPK: ~pagePK: ~piPK: ~theSitePK: ,00.html

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